Should I Borrow Against My House to Buy Stocks?

By Jack Hough

Question: I do not carry any mortgages on two homes. I am in one of the higher tax brackets and have sufficient cash to protect my current lifestyle. With home mortgage interest rates as low as they are, should I take out a 15 year mortgage (at 3.3%) or 30 year mortgage (at 4.1%) — both with $350 closing costs and fees — and then invest those funds in very conservative investments to generate income to cover or exceed those rates?

– Mike Maier, Cincinnati, OH

Answer: To your point, mortgage rates are at historic lows and there’s nothing inherently wrong with using debt strategically to enhance returns — professional investors do it all the time. But we’re nonetheless reluctant to recommend taking out a mortgage to buy stocks or other investments.

Consider some scenarios of what could go wrong.

1. You might not earn more on your investments than you pay on your mortgage (even with the interest tax deduction). Bond yields, like mortgage rates, are extremely low. Investors have recently accepted yields of below 2% on 10-year Treasury bonds. Stocks look reasonably priced relative to earnings, but earnings also look unsustainably high.

Some market researchers think the U.S. has entered a long period of modest long-term stock returns–think 4% a year instead of 8% . There’s plenty of precedent for that; stocks underperformed bonds in the U.S. from 1803 through 1857 and again from 1929 through 1949. And stocks have been much worse than bonds over the past decade.

2. Inflation might not be much help in reducing the real value of your loan. True, the Federal Reserve has been excessively loose with monetary policy of late, and that can create inflation. But there’s an opposing, deflationary force in weak consumer demand. It’s difficult to say which will win out. Japan, another rich, heavily indebted country that has long had loose monetary policy, has mostly seen deflation and falling asset prices over the past two decades. (It’s key Nikkei 225 stock index has plunged by more than three-quarters since December 1989.)

3. Several things could go wrong at the same time, as they tend to do when it comes to personal finance. A severe economic downturn that tanks your stock holdings (just a possibility, not a prediction) could hurt your wages or business income, too. If it reduces tax receipts where you live, politicians might raise property tax rates. In Washington, D.C., policy makers might cap the mortgage interest deduction in order to raise revenues, making your mortgage a little more expensive.

If despite these possibilities you decide the strategy is right for you, borrow only an amount that’s minimal relative to your property value. Make sure the payments are easily affordable on your current income. If you’re buying stocks, target companies that can deliver growing dividend payments in good times and bad. That way, even if share prices go nowhere for a while, your stream of investment income may eventually grow larger than your mortgage payments, increasing the chances–but in no way guaranteeing–that your leverage will pay off.

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